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Forms of Market | Economics | The Encyclopedia | Lucky Ali Saifi


 Market Forms

Q- Meaning and basis for classifying market form.


Forms of Market:

 The market may assume different forms depending on the factors like the number of buyers and sellers, the nature of the product bought and sold, and barriers to firms' entry and exit.

 Based on the given factors, there are two primary forms of the market:

 Perfect Competition:

 It is a form of market where there are many buyers and sellers of a commodity. No individual seller has control over market supply where homogeneous products are sold at a uniform price. There is no restriction of entry and exit of firms. In perfect competition, buyers and sellers have excellent knowledge about the market condition.


Imperfect Competition:

This market is classified into three types are as follow:

  1. Monopoly: It is a market structure in which there is a single seller. There are no close substitutes for the commodity sold by the monopolist. e.g., the government has a monopoly of cable networks, water supply, Indian railways, etc.
  2. Monopolistic Competition: It is a form of the market where there are many sellers of the product, but each seller's product is somehow different. e.g., firms producing various brands of toothpaste, viz Colgate, closeup, pepsodent, etc.
  3. Oligopoly: It is a form of the market where there are a few big sellers of a commodity and many buyers. Each seller has a significant share of the market, e.g., there are only a few auto-producers in the Indian market—Maruti, Tata, Fiat, Ford, and GMare some well-known brand names in this sector.

Q- Define perfect competition. Explain its various features of the ideal match?


Perfect Competition:

 It is a form of market where there are many buyers and sellers of a commodity. No individual seller has control over market supply. Where homogeneous products are sold at a uniform price. There is freedom of entry and exit of firms. Buyers and sellers have perfect knowledge about the market condition.


Features of Perfect Competition


 Perfect the competitive market exhibits the features given below:

  1.  A considerable number of buyers and sellers: There are many buyers and sellers in the market. No individual buyer or seller can influence the price of the commodity in the market. Any change in the output supplied by a single firm will not affect the industry's total outcome, as they are tiny according to the market size. Similarly, any change in one buyer's demand pattern would not affect the market demand because of his insignificant share in the commodity's total order.
  2. Homogeneous product: Firms in this market sell a homogeneous product. Homogeneity of a product implies that one unit of the product is a perfect substitute for another, i.e., there is no difference in the products in any form. 
  3. Free entry and exit of firms: In a perfectly competitive market, there are no barriers to firms' entry or exit. Entry or exit may take time, but firms have the freedom to move in and out of an industry without any government intervention.
  4.  Perfect knowledge: Firms have all the knowledge about the product market and the factor market. Buyers also have excellent knowledge of the product market.
  5. ExcellentExcellent mobility of production factors: The elements of production can move quickly from one firm to another. Workers can also move between jobs and places. 
  6. Absence of transportation cost: Goods can easily be transported from one place to another without additional transportation costs.

Q- Define Monopoly. Discuss its features.

It is a market structure in which there is a single seller. There are no close substitutes for the commodity sold by the monopolist. e.g., the government has a monopoly of cable networks, water supply, Indian railways, etc.

Features of Monopoly:

 Monopoly market exhibit the features given below: 

  1. One seller and many buyers: Under monopoly, there is a single producer of a commodity. He may be alone, or a group of partners, a joint-stock company, or a state. However, there are a large number of buyers of the product.
  2.  Restrictions on the entry of new firms: Under monopoly, there are some restrictions on new firms' threshold into the monopoly industry. Generally, patent rights or exclusive control over a technique or raw material prevents other firms from entering the market.
  3. No close substitutes: A monopoly firm produces a commodity wiwith no close reserves, e.g., there is no close substitute for Microsoft's Microsoft's Microsoft's operating systems. They have a monopoly in this segment.
  4. Full control over price: Being a single seller of the product, a monopolist has complete control over its price. A monopolist thus is a price maker. He can fix whatever price he wishes to set for his product. Therefore, a monopolist is referred to as a price maker.
  5. Price discrimination: A monopolist may charge different fees from different buyers. It is called price discrimination. e.g., electricity boards charge a higher tariff for commercial use than domestic use.
  6. Price maker: Under monopoly, a single seller dealt in the market. He holds power over the price that he charges for a commodity.

Q- Explain monopolistic competition and its features.

It is a form of the market where there are many sellers of the product, but each seller's outcome is somehow different. e.g., firms producing various brands of toothpaste, viz Colgate, closeup, pepsodent, etc.


The monopolistic market exhibits the features given below: 

  1. Many buyers and sellers: There are a large number of buyers and sellers of the commodity. No individual seller is big enough to influence the market on his own. No single buyer can exercise any significant influence on the price of the product on his own. 
  2. Product differentiation The consequences of the sellers are differentiated but are close substitutes for each other. Product differentiation can be real or artificial. Its effect is that sellers have some control over the price of their product. 
  3. Free entry or exit of firms Firms can freely move in and out of a group. In monopolistic competition, the industry concept is undefined as a product of industry; the word group' should be used. 
  4.  Imperfect knowledge Buyers and sellers do not have perfect or market conditions. Buyer's preferences are guided by advertising and other selling activities undertaken by the sellers.
  5. Cost of sale: A firm under monopolistic competition acquires a charge of the deal, which is the cost of promoting the demand for its product, e.g., advertisement, window displays, salesmen salaries, etc.
  6.  The cost of transporting the commodity from one place to another is very high under monopolistic competition.

 Q- Distinguish between perfect competition and monopoly?


Basis
Perfect competition
Monopoly
Numbers of Sellers
There are vast numbers of sellers and no individual seller has control over market supply.
There is single seller and the monopolistic has full control over the market supply.
Nature of products
The product is homogeneous. It is identical in all respect.
There is no close substitute of the product.
Entry and exit
There is freedom of entry and exit of firms.
There is restriction on entry and exit. So a firm can earn abnormal profit and loss in the long-run.
Price
Firm is the price-taker as the price is determined by the industry.
Monopolistic is a price-maker as firm and industry are one and the same thing.
Level of Knowledge
Buyers and sellers have a perfect experience of the market condition.
Buyers and sellers do not have perfect knowledge about the market condition.
Selling Cost
No selling cost is incurred.
Selling cost is incurred.

Q- Distinguish between perfect competition and monopolistic competition?

Basis
Perfect competition
Monopolistic competition
Numbers of Sellers
There are vast numbers of sellers and no individual seller has control over market supply.
There are a large number of sellers. So, a firm does not have much impact on market supply.
Nature of products
The product is homogeneous. It is identical in all respect.
Product is differentiated based on Brand, size, color, shape, etc.
Entry and exit
There is freedom of entry and exit of firms. It leads to the absence of abnormal profit and losses in the long-run.
There is freedom on entry and exit. So a firm can earn only an expected profit in the long-run.
Price
Firm is the price-taker as the price is determined by the industry.
Firm has partial control over price due to product differentiation.
Level of Knowledge
Buyers and sellers have a perfect experience of the market condition.
Buyers and sellers do not have perfect knowledge due to differentiation and selling cost incurred by the seller.
Selling Cost
No selling cost is incurred.
Heavy selling cost is incurred.

Q- Discuss the nature of the demand curve under:
  • Perfect competition
  • Monopoly
  • monopolistic competition
  • Oligopoly competition


Demand curve under perfect competition:

 
Under perfect competition, the demand curve of the firm is perfectly elastic.
(Ed=∞). 
It means that the firm can sell any amount of the prevailing price.
Demand curve under monopoly:

Under monopoly, the firm's demand curve slopes downward from left to right. It means that if a monopolist wants to sell more, he has to reduce the products' price.
The given figure shows the inverse relationship between price and quantity. 

Demand curve under monopolistic competition:
Demand curve under monopolistic competition downward sloping from left to right, exhibiting an inverse relationship between price and quantity demanded.
 It is because, in a monopolistic competitive market, goods have close substitutes. Hence consumers can easily choose the replacements whenever there is a change in the price of a commodity. 
AR curve is the demand curve of a monopolistic competition firm, which is negatively sloped and elastic.
Demand curve under Oligopoly:
The conditions in an oligopoly market are very complicated. It s tricky to determine the firm's demand curve as in this competition, one cannot predict the changing demand.
 When a firm lowers its price, demand for its product may not increase as the rival firms may opt for this price cut policy. Hence, the demand curve under this form of the market cannot be determined. 
Professor Paul Sweezy had drawn a demand curve known as the kinked demand curve for an oligopoly market, which has two segments in the single turn, one of which is relatively more elastic than the other.


Q- Explain the term 'price maker' and 'price taker.' Under which market form seller is called the price maker and price taker, and why?

Price maker: The firm is called a price maker. As a single seller deals in the market, he holds power over the price he charges for a commodity.
Price taker: The firm is called a price taker. It has to adopt the price determined by the market forces of demand and supply.

Under perfect competition, the industry is determined by the industry because there are many sellers of a homogeneous product. No single seller, by changing the supply, can influence the price. So, the firm is a price taker. 
Under monopoly, a monopolist is a single seller and determines the price himself. He is a price maker. There is no challenge to his price decisions as there are no other firms in the market, and there are no close substitutes for his product. Barriers to entry of new firms further strengthen his position as a price maker.

Q- Why are firms said to be interdependent in an Oligopoly market? Explain?

An oligopoly is a form of market in which only a few firms are operating in the market, and each firm is enormous in size. This leads to massive interdependence among the firms. They generally avoid price competition as a price-cut by one firm may lead to a price war, leading to a revenue loss for both firms.

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